Getting Back to Capacity

Oct. 8, 2010

Options for manufacturers when slow demand cuts into capacity utilization

U.S. plants used an estimated 69% of their full production capacity for the second quarter of 2010. That's up from nearly 60% in the same period last year but still down from second-quarter 2008 when plants used 73% of their production capacity during the pre-recession period, the U.S. Census Bureau reported on Sept. 30.

The economic downturn caught many manufacturers off-guard, forcing them to make some difficult decisions about how to handle excess plant capacity. Nearly everyone undertook basic belt-tightening initiatives, including layoffs, overtime reductions and cutting non labor expenses, says Stephen Maurer, managing director of the manufacturing practice at advisory firm AlixPartners.

Keith Updike:
Manufacturers should diversify their customer base to prevent future capacity utilization issues. But manufacturers also adopted less-conventional strategies for dealing with excess capacity. In some cases, manufacturers began insourcing processes that were noncore functions, Maurer says. In the auto industry, for instance, some manufacturers brought stamping or molding operations that were previously outsourced because of capacity constraints back in-house, says Keith Updike, managing director at consultancy firm BBK. Some manufacturers became more vertically integrated by looking downstream at some of their component suppliers and bringing them in-house as well, Updike says.

But Maurer cautions that insourcing driven by a desire to absorb fixed costs rather than part of a larger strategy could backfire. "If a part or process was noncore before, it is still noncore," he says. "Filling up your plant with low-margin, noncore work -- sometimes at an increase in variable cost -- to absorb overhead is almost always a bad idea in the long run," he says. "Companies should be taking the longer view, operating to a consistent manufacturing and supply chain strategy and taking the hard steps to get their cost structure in line to support that strategy at the current volumes."

Office furniture manufacturer Steelcase Inc. didn't resort to insourcing for the same reasons cited by Maurer. "We stuck to our strategy of only doing things that are a core competency and didn't want to pull things in and then move them back out again later," says Mark Baker, the company's senior vice president of global operations.

A Toyota Tacoma rolls off the line at Toyota Motor Manufacturing's San Antonio, Texas, facility. The company moved production of the Tacoma from its now-closed NUMMI plant to utilize unused space at the Texas facility.Some manufacturers, such as Toyota Motor Corp., consolidated operations to utilize unused space. In July Toyota transferred production of the Tacoma pickup truck from the now-closed New United Motor Manufacturing (NUMMI) plant in California to its San Antonio, Texas, truck plant. The company said the move would allow it to fully utilize the San Antonio plant's capacity, which had been impacted by poor sales.

Steelcase consolidated some operations, but Baker says that would have happened regardless of the economic climate. "Frankly, we would have done that whether the recession had occurred or not, as these were part of our long-term strategy for reinventing our industrial model," he says.

Updike recommends that manufacturers diversify their customer base to prevent future capacity issues. In the past, one customer may have dominated 60% to 70% of a manufacturer's business, but nowadays companies need to be more aggressive in their efforts to establish new customers so they don't have their eggs all in one basket, Updike says.

About the Author

Jonathan Katz | Former Managing Editor

Former Managing Editor Jon Katz covered leadership and strategy, tackling subjects such as lean manufacturing leadership, strategy development and deployment, corporate culture, corporate social responsibility, and growth strategies. As well, he provided news and analysis of successful companies in the chemical and energy industries, including oil and gas, renewable and alternative.

Jon worked as an intern for IndustryWeek before serving as a reporter for The Morning Journal and then as an associate editor for Penton Media’s Supply Chain Technology News.

Jon received his bachelor’s degree in Journalism from Kent State University and is a die-hard Cleveland sports fan.